The rapid growth in number of the oldest old has created pressures to expand U.S. nursing home capacity. Concerns about the quality of nursing home care, crystalized in the 1986 Institute of Medicine report, have prompted regulators and researchers to consider judging nursing home quality on the basis of the outcomes achieved by the residents' experience. Since functioning is increasingly seen as the meaningful indicator of nursing home residents' quality of life, the observed rate of functional decline or stability manifested by nursing home residents is now considered to be a central measure of outcome. The purpose of this project is to examine conceptual and technical issues involved in modelling the passage of nursing home residents through a sequence of functional states, death, hospital transfer or return to the community. We believe successful modelling of the phenomenon of functional change in this population will provide the basis for evaluating meaningful outcome oriented quality assurance indicators such as functional decline. Using an extensive longitudinal patient data base drawn from multiple panels of new, admissions to nursing homes owned or managed by the National Health Corporation, we will examine the medical and diagnostic as well as the social and behavioural factors that affect nursing home residents' chance of transition between levels of physical function, to death, to hospital and to the community. In this process we will study the statistical problems that arise in fitting stochastic process models to observations of those transitions. We will develop model based indicators of the quality of nursing home care that can be used to predict the future functional states of residents with various combinations of relevant medical and social covariates. Study results will include improvements in the methods of estimation of the probabilities of ADL transition, the expected duration of stay in each level, and the expected length of stay in the nursing home prior to discharge or death.